NCLAT Rejects Authum Plea Against Takeover of Srei Twins

NCLAT Clears Path for NARCL Takeover

Source and Citation: Excerpted from news article published in The Economic Times on January 9, 2024.

Analysis of NCLAT Decision for Layman Understanding

The National Company Law Appellate Tribunal (NCLAT), responsible for insolvency case appeals, has dismissed Authum Investment and Infrastructure’s challenge against National Asset Reconstruction Company Limited (NARCL) taking over Srei Infrastructure Finance (SIFL) and Srei Equipment Finance (SEFL). SIFL and SEFL, non-banking financial companies (NBFCs), faced financial distress due to bad loans, undergoing Insolvency and Bankruptcy Code (IBC) proceedings. NARCL, a government-backed ‘bad bank,’ specializes in acquiring distressed assets, with Authum Investment as another bidder. The Committee of Creditors (CoC) approved NARCL’s resolution plan, and the NCLAT’s dismissal clears the way for a smooth takeover.

Impact on Retail Investors

The takeover provides clarity for retail investors in Srei-connected companies, benefiting banks and NBFCs like UCO Bank, Punjab National Bank, and Union Bank. NARCL’s takeover of NPAs improves these banks’ balance sheets, allowing creditors to recover higher amounts, up to 17% of admitted claims. However, retail investors in Srei face uncertainties about repayment, depending on NARCL’s success in revitalizing the companies.

Impact on Industries

The infrastructure and finance sectors will be significantly affected, with Srei’s focus on infrastructure financing. NARCL’s takeover can unlock growth in sectors like power, telecom, and roads, facilitating NPA resolution in the banking system. Public sector banks burdened with bad loans will benefit, cleaning up their balance sheets and boosting lending capacity. NARCL’s success here can pave the way for faster NPA resolution across sectors.

Long Term Benefits & Negatives

In the long run, the takeover offers benefits like financial stability, increased credit availability, and economic growth. Banks with more capital can lend further, aiding businesses in expansion through credit access. For NARCL, it establishes itself as a reliable bidder for distressed assets, with future bids facing fewer legal challenges. Long-term advantages include faster recoveries for Srei lenders and stimulus for PSBs to redirect capital into new lending.

Short Term Benefits & Negatives

In the short run, the Srei takeover fast-tracks NPA resolution and improves PSB balance sheets. This offers an opportunity for banks to shore up capital adequacy, benefiting retail bank investors. Bidders like Authum may face short-term losses, but NARCL’s promises to creditors set a precedent for time-bound implementation of future resolutions. However, short-term uncertainties persist with stalled projects and retail deposits under NARCL’s interim management.

Companies Affected by NCLAT’s Decision on Srei Takeover:

Indian Companies Likely to Gain:

1. National Asset Reconstruction Company Ltd (NARCL):

   • This clears the roadblock for NARCL’s largest acquisition and first through the bankruptcy process, boosting its credibility and attracting further distressed asset deals.
   • Market sentiment should be positive, potentially leading to increased investor confidence and potentially higher valuations.

2. Lenders to Srei Infrastructure Finance (SIFL) and Srei Equipment Finance (SEFL):

   • With all formalities complete and handover expected within 10 days, they get a 17% recovery on their admitted claims, faster than previously anticipated.
   • This improved debt resolution could positively impact their financial performance and market sentiment.

3. Other distressed asset resolution players:

   • NARCL’s successful acquisition sets a precedent and could entice other players into the market, potentially increasing competition and improving recovery rates for lenders across distressed assets.
   • This could benefit companies like Edelweiss ARC, JM ARC, and Reliance ARC indirectly.

4. Infrastructure and equipment finance companies:

   • The resolution of Srei’s issues provides some stability to the sector, reducing concerns about systemic risk and potentially improving access to capital for healthy players.
   • Companies like L&T Finance, HDFC Equipment Finance, and Tata Capital could benefit from this improved sentiment.

5. Legal and accounting firms:

   • The complex nature of the resolution process could generate increased demand for their services in managing similar distressed asset cases.
   • Firms like Cyril Amarchand Mangaldas, Shardul Amarchand Mangaldas, and Deloitte Touche Tohmatsu could see increased business opportunities.

Indian Companies Likely to Lose:

1. Authum Investment & Infrastructure:

   • Losing the bid for Srei could hurt their reputation and potentially hamper their ability to secure future deals in the distressed asset space.
   • Market sentiment might turn negative, impacting their stock price and future fundraising efforts.

2. Smaller creditors to Srei:

   • While receiving their share of the recovery, the focus on larger institutional lenders might mean their concerns and needs receive less attention during the handover process.
   • This could lead to negative sentiment among smaller creditors.

3. Shadow banking sector:

   • NARCL’s success could further strengthen the role of bad banks in resolving stressed assets, potentially reducing the dependence on NBFCs for such resolution.
   • This could negatively impact some NBFCs in the long run.

4. Companies dependent on Srei financing:

   • With Srei under new management, their lending practices and priorities might change, potentially impacting some borrowers who relied heavily on Srei for financing.
   • This could lead to financial stress or disruptions for such companies.

5. Real estate sector:

   • Srei’s exposure to the real estate sector was significant. The resolution process might involve asset liquidation, potentially leading to increased supply and downward pressure on real estate prices in the short term.

Global Companies:

The impact on global companies is likely to be limited. However, some asset management firms or hedge funds with exposure to Indian distressed assets might experience positive or negative sentiment depending on their involvement with Srei or NARCL.